Transocean Ltd. 2018 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2018. Transocean provides offshore contract drilling services, focused on ultra-deepwater and harsh-environment drilling. At June 30, 2018, it owned or operated 43 mobile offshore drilling units and was constructing two ultra-deepwater drillships and one harsh-environment semisubmersible.
Transocean completed its acquisition of Songa Offshore during the quarter, acquiring seven rigs, significant contract backlog and related debt. Songa became wholly owned on March 28, 2018.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |
| Total revenues | $790 million | $751 million | $1.454 billion | $1.536 billion |
| Contract drilling revenues | $790 million | $705 million | $1.454 billion | $1.443 billion |
| Operating loss | $(917) million | $(1.542) billion | $(921) million | $(1.373) billion |
| Net loss attributable to controlling interest | $(1.135) billion | $(1.690) billion | $(1.345) billion | $(1.599) billion |
| Loss per diluted share | $(2.46) | $(4.32) | $(2.99) | $(4.09) |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $106 million | $544 million |
Approximate reported margins were negative: operating margin was approximately (116%) in the quarter and (63%) for the six months; net margin attributable to controlling interest was approximately (144%) and (93%), respectively. These margins were heavily affected by non-cash impairment charges.
- Six-month operating and maintenance expense rose 26% to $855 million, while general and administrative expense increased 34% to $99 million.
- Six-month impairment losses were $1.014 billion, consisting of $548 million for rigs classified as held for sale and $463 million for full impairment of goodwill.
- At June 30, 2018, cash and cash equivalents were $2.506 billion; restricted cash and investments totaled approximately $497 million.
- Total debt carrying amount was $9.630 billion, including $1.816 billion due within one year. Principal debt was $9.708 billion.
- The company had no borrowings under its new $1.0 billion secured revolving credit facility, $12 million of letters of credit outstanding and $1.0 billion of available capacity.
- Total assets were $24.246 billion and total equity was $12.362 billion at June 30, 2018.
Material changes versus the prior comparable period
- Second-quarter revenue increased 5%, driven by the Songa acquisition, newbuild drillships, rig reactivations and contract termination and reimbursement revenues. These benefits were partly offset by lower dayrates, more idle or stacked rigs and asset sales or classifications as held for sale.
- Six-month revenue declined 5%, as lower dayrates, increased idle or stacked capacity, lower revenue efficiency and asset dispositions outweighed the Songa acquisition and newbuild contributions.
- Total fleet utilization improved to 57% in the second quarter from 44% in the prior-year quarter, while revenue efficiency remained 97%. Average daily revenue declined 7% to $308,300.
- Operating loss improved from the prior year primarily because the 2017 period included a $1.595 billion loss on disposal of assets. The 2018 period nevertheless included $1.014 billion of impairment charges.
- Six-month operating cash flow fell $438 million to $106 million, primarily because of reduced operating activity and the absence of $172 million of prior-year customer termination payments.
- Debt increased substantially due to the Songa acquisition, including $863 million of exchangeable bonds and assumed secured loans. Shares outstanding also increased by approximately 68 million shares in connection with the acquisition.
Guidance, outlook, commentary and risks
Management expressed a positive long-term view of the offshore drilling market, particularly for harsh-environment and ultra-deepwater floaters. Brent prices above $70 per barrel were described as improving customer economics and supporting 2019 drilling budgets. Harsh-environment utilization and dayrates were improving, while excess ultra-deepwater capacity continued to delay broader dayrate recovery.
- Contract backlog was $11.7 billion as of July 23, 2018, down from $12.5 billion on April 18, 2018 and $12.8 billion on February 19, 2018. Backlog includes $3.7 billion acquired from Songa at the acquisition date.
- Uncommitted fleet rates remained high, including 75% for ultra-deepwater floaters and 66% for harsh-environment floaters for the remainder of 2018.
- Management expected positive operating cash flow over the following year, but noted dependence on drilling-market conditions, customer activity, asset sales and access to debt markets.
- Two newbuild ultra-deepwater drillships were expected to be delivered in the second and fourth quarters of 2020, with estimated total completion costs of $810 million and $760 million, respectively. Neither had a drilling contract at the reporting date.
- Transocean committed to additional investments of $50 million in January 2019 and $33 million in January 2020 for its 33% interest in the Transocean Norge project, expected to be delivered in the first quarter of 2019.
- Senior secured term loans and junior secured bonds totaling approximately $731 million were classified as current because of change-of-control waivers and planned refinancing, restructuring or repayment.
- Subsequent to quarter-end, Transocean issued $750 million of 5.875% senior secured notes and $600 million of 6.125% senior secured notes. It used $855 million of proceeds to repay the Senior Secured Term Loans due March 2026.
- Material risks include low utilization and dayrates, contract cancellations or renegotiations, customer credit risk, impairment of rigs and goodwill, newbuild cost or delivery delays, below-investment-grade debt ratings, refinancing needs, interest-rate and currency exposure, tax assessments and litigation.
- Macondo-related estimated probable loss contingencies were $217 million at June 30, 2018. Brazilian tax assessments totaled approximately $260 million, although the company was contesting them.
- Global Marine litigation sought possible acceleration of $300 million of notes and could have affected the new credit facility absent a waiver; Transocean stated that the notes had no recourse to Transocean Ltd. or its other subsidiaries.
Most important facts for an investor to verify
- Whether the company can sustain positive operating cash flow while substantial debt maturities and interest obligations remain outstanding.
- The terms, collateral and covenant compliance of the new credit facility and post-quarter-end secured note financings.
- The refinancing or repayment status of the remaining Songa-related secured debt and junior secured bonds.
- Actual utilization, dayrates, contract awards, cancellations and backlog conversion, particularly for ultra-deepwater rigs.
- The valuation assumptions supporting the $463 million goodwill impairment and $548 million held-for-sale asset impairment.
- Delivery costs, timing and contract status of the two uncontracted drillships and Transocean Norge.
- Developments in Macondo-related claims, Brazilian tax matters, Global Marine litigation and other contingent liabilities.
- Potential dilution from the $863 million exchangeable bonds, which had a conversion price of $10.28 per share.